CONTRIBUTORS
Christy Tan
Investment Strategist
Franklin Templeton Institute
The four-hour meeting in San Francisco on November 15 between Chinese President Xi Jinping and US President Joe Biden, marked by a working lunch and a stroll on estate grounds, seemed to primarily be a rapport-building exercise. The aim was to recalibrate the relationship in economic and climate areas, with potential extensions to security issues. The meeting, while high stakes, had deliberately modest expectations. The resulting commitment to dialogues and mutual respect affirmations have reassured investors, dispelling significant geopolitical uncertainty this year.
While the common goal was to reduce tension, both nations had broader objectives. President Biden sought a willingness to resume military-level communications, which China previously suspended following ex-US House Speaker Nancy Pelosi’s Taiwan visit. Progress was noted in areas like climate change and fentanyl control. China sought assurances against economic decoupling. Regarding Taiwan, the message was that the US should uphold its commitment of not supporting Taiwan independence. Trade issues, however, remained unresolved, due to the sensitive political landscape in the United States and the looming possibility Donald Trump will become the Republican presidential nominee in 2024.
The détente, albeit fragile, is a relief for investors, signifying a reduced appetite for confrontation from both sides. Key takeaways from our view include a focus on agreed-upon issues, improved diplomatic ties with potential fluctuations around upcoming US and Taiwan elections, and the likelihood of more talks easing China-Taiwan tensions. Some US market sectors look poised to benefit from stable US-China relations, including the energy, financial and selected manufacturing industries. These could be in the form of enhanced cooperation in green energy and China’s key role in electric vehicle material processing and battery production, as well as reduced hesitation in cross-border capital and trade flows with reduced risks on sanctions or exclusions. Overall, we believe the détente offers a window for restoring portfolios in related investments, potentially unlocking underpriced opportunities.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.